There is a prevailing view in financial markets that younger directors are needed on boards - to a point. But recent evidence suggests younger boards do not equate to stronger company performance.
The case for younger boards, on paper, is compelling. They tend to be more diverse and have a higher proportion of female directors. Right or wrong, it is assumed that younger directors are better able to understand technology and digital disruption.
The case for older boards is equally strong. In theory, age brings experience, intuition and wisdom. Older directors have more skill in “joining the dots” because they may have been involved in similar governance situations. Perhaps they have a cooler head in a crisis.
All of this, of course, is based on generalisation. The correlation between board age and organisation performance in Australia has not been extensively studied and the link between the two may be tenuous given the many variables that drive organisation returns.
Nevertheless, the push for younger boards continues. The average age of non-executive directors in ASX 100 companies was 61.9 in 2015, Australian Council of Superannuation Investors (ACSI) research shows. That was the lowest since 2011 and adds to the trend of younger boards. The average board’s age in Australia rose steadily in the previous decade.
Several factors are driving this trend. First, women directors in the ASX 100 were, on average, almost six years younger than male peers in 2015. As boards strive for greater gender diversity, the increase in female directors is lowering the average board age.
Demand for directors with technology experience is another factor. Some ASX 100 boards have recruited younger directors who led technology firms, to enhance their understanding of digital disruption. This trend, unlikely to much reduce the average board age, underscores the growing appreciation boards have of younger directors in the digital economy.
Director tenure is another factor. The average tenure of non-executive directors of ASX 100 boards was 5.9 years. There has been a push by investors against directors who serve too many terms on a board. The market wants to see reasonable board refreshment – a trend that sometimes leads to older, male directors being placed by younger men or women.
Mandatory retirement for directors in some companies, more popular overseas than here, is also pushing down the average board age.
As the push for younger directors intensifies, the counter-argument for board age may be underappreciated. As global markets become more volatile, and as boards are expected to govern across a wider range of Environmental, Social and Governance (ESG) issues, it is reasonable to ask if there should be a premium on director age and experience.
At a minimum, it is fair to ask if the market’s focus on board age risks being ageist and too simplistic. Some of Australia’s most accomplished directors are in their seventies and there is ample anecdotal evidence of older directors who serve several terms on a board continuing to provide great value for shareholders.
Age is just a number
Recent research by US board-data provider Equilar has found having younger directors on boards does not necessarily lead to better company performance.
Equilar tracked a sample of the 500 largest US companies by revenue, comparing each company’s change in the median director age over the past three fiscal years with the three-year total shareholder return. Equilar found limited correlation between the two.
“In general, the age of directors at a company does not have any significant effect on its performance,” wrote Equilar in a January 2018 commentary for the Harvard Law School Forum on Corporate Governance and Financial Regulation.
Equilar found two thirds of companies it sampled had a decrease in the median director age over the three-year period. “This indicates that refreshment, in particular refreshing with younger directors, is a real phenomenon, regardless of its correlation with performance,” it said.
As Equilar notes, median director age does not tell the whole story. Two boards might be of similar average age, yet one is more diverse than the other, with a mix of male and female directors and younger and older directors. Also, company performance is affected by many variables beyond the board and the age of its directors.
Equilar wrote: “It may be too early to see how the trend towards younger directors is truly affecting company performance. One thing that is known, however: younger directors provide different outlooks and experiences to provide boards with new perspectives on competing in the changing business climate. Companies will continue to adapt to the business climate by hiring fresh, new directors and trying to increase value for shareholders.”
In an ageing society, it will pay to have more Australian evidence on the link between boardroom age and company performance, over a long period. Relying on generalisations and stereotypes about age – old or young – and its impact on company performance will do stakeholders a disservice.